Newfoundland Loses Latest Round Against AbitibiBowater Inc.

Newfoundland has failed in its latest effort to compel AbitibiBowater Inc. to clean up industrial sites that the company once owned and operated in the province. The Quebec Court of Appeal decision in Newfoundland v. AbitibiBowater Inc., 2010 QCCA 965, denied the province leave to appeal of an earlier decision by the Superior Court in AbitibiBowater Inc. (Arrangement relatif à), 2010 QCCS 1261. Media reports suggest that the Newfoundland may seek leave to appeal to the SCC, though that is not certain.

Background and Facts

AbitibiBowater Inc., a US incorporated pulp and paper manufacturer, operated throughout the province of Newfoundland for over a century. In 2008 Abitibi announced that its last operating mill, located in Grand Falls-Windsor, would close in March of 2009. This marked the end of the company’s active operations in the province. However, Abitibi still retained numerous property rights, assets, and undertakings within Newfoundland amounting to well over $300 million. This included interests in hydroelectric facilities, surface rights, and paper mills.

Twelve days after the final closure was announced the province rushed through the Abitibi-Consolidated Rights and Assets Act, S.N.L. 2008, c. A-1.01 (“Abitibi Act”), expropriating the majority of the company’s provincial assets. This included the cancellation of “water and hydroelectric contracts and agreements” between the province and Abitibi, the cancellation of ongoing legal proceedings Abitibi had against the province, and the blocking of access to Newfoundland’s courts by Abitibi. In response, the company filed a Notice of Arbitration under NAFTA Chapter 11 seeking redress for the expropriation in the amount of $500 million. The NAFTA claim is ongoing and will not be discussed in detail here.

In November of 2009 the province issued Environmental Protection Act, SNL2002 Chapter E-14.2 (“EPA”) orders per s. 99 of the EPA, compelling Abitibi to clean up various sites, many of them expropriated under the Abitibi Act. Abitibi had to submit a remediation plan by January 15, 2010 and the cleanup or “remediation actions” were to be completed by January 15, 2011. The estimated cost of the cleanup was significant–“from the mid-to-high eight figures.” Abitibi claimed that the EPA orders were a part of a “campaign of retribution and harassment against it, with the apparent goal of dissuading [the company] from pursuing its claims for compensation” under NAFTA.

Before the EPA orders were issued, Abitibi filed for protection from its creditors under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”). Through the CCAA a company that owes in excess of $5 million can apply for an initial order for protection from creditors for a period of 30 days (extensions can be had upon court approval). During this period a company is expected to prepare a plan of compromise or arrangement. In the present case, an initial stay order and subsequent extension order were both granted by the court. The extension order included an amendment to the initial stay order (at s. 10.1) essentially stating that the stay order would not apply to government regulatory orders. The stay imposed would not affect a government’s exercise of powers in relation to matters of “public health…or the environment…”

Accordingly, Newfoundland argued that the EPA orders were non-monetary, subject to the exception in s. 10.1, and thus were not within the scope of the creditor claims process under the CCAA. Abitibi requested that the court find that the EPA orders did not meet the exception in s. 10.1 and were claims “stayed by the stay of proceedings issued in the initial order.” Consequently, the province would be barred from filing any claims during the reorganization process, including the EPA orders, as the deadline to do so had passed.

The Quebec Superior Court Decision

The primary issue before the Superior Court was whether or not the EPA orders compelling Abitibi to clean up the expropriated sites were “statutory non-monetary obligations” or “financial or monetary in nature.” If found to be the latter then they would “fall within the meaning of claim under the CCAA…” Abitibi rejected the characterization of the orders as non-monetary in the hope they would be brought within the creditor protection process. If that happened, the enforcement of the orders would be subject to the court’s discretion and would most likely remain unfulfilled, leaving Newfoundland with the bill for the cleanup. Also, if a claim was not submitted within the process timeline it would be “extinguished for good,” unless an extension was granted to the province.

The EPA Orders Are Claims within the Scope of the CCAA

The Superior Court found the orders to be “in substance financial or monetary in nature” and within the definition of a claim under CCAA protection. The following factors were considered:

– The provisions of the CCAA;
– The true nature and impact of the EPA Orders;
– The factual context of their issuance and their content;
– The Province’s behavior prior and after their issuance;
– The EPA and the applicable case law; and
– The end result of the Province’s position.

A “claim” as defined in s. 12(1) of the CCAA is, in part, “any indebtedness, liability or obligation of any kind that, if unsecured, would be a [claim] provable in bankruptcy…” The Bankruptcy and Insolvency Act (“BIA”) has a similar definition in s. 121(1).

According to the Superior Court “[t]he true regulatory character or otherwise financial and monetary nature of a given order is influenced by who issues the order, who stands to benefit from it, what remains its genuine objective and what means of enforcement truly exist in reality.” If you have been following the Abitibi-Newfoundland dispute you will immediately identify the problem for Newfoundland with the application of these criteria. In fact, it is common conjecture that the orders were given to offset the potential cost of a NAFTA claim. According to the Superior Court:

[i]n all likelihood, the pith and substance of the EPA Orders is an attempt by the Province to lay the groundwork for monetary claims against Abitibi, to be used most probably as an offset in connection with Abitibi’s own NAFTA claims for compensation… [Furthermore] [t]he evidence suggests that the target was not the enforcement of statutory duties or obligations. The target was Abitibi.

The majority of the property subject to the orders was in the hands of the province. The lower court found that as a result “money is clearly the only remedy”—Abitibi does not have access to the property it has been ordered to cleanup. Hence, the province would derive the financial benefit from the cleanup, not Abitibi. Also, according to ss. 102(3) and 102(4)of the EPA any unfulfilled order becomes a debt to the province. In that sense, Newfoundland is a creditor with a claim as defined in s. 12(1) of the CCAA .

Finally, the province attempted a constitutionally based argument asserting that Quebec lacked the jurisdiction to interfere with a statutory power of the Newfoundland government. This argument was dismissed by the Superior Court with a reference to the characterization of the orders as monetary in nature and within the claims process.

The Quebec Court of Appeal Denies Leave to Appeal

The Superior Court convincingly characterized the EPA orders as monetary or financial in nature. The Court of Appeal agreed and noted that the EPA orders were not immunized by the lower courts decision but merely drawn into the claims process. In other words, the Superior Court did not go beyond its jurisdiction because it did not impair the orders in a manner that suggested interference with provincial powers. The Court of Appeal also noted that, taking into account the restorative purpose of the CCAA, the impact of the EPA orders may have caused undue harm on the creditor claims process and Abitibi’s reorganization.

Furthermore, the Appeal court held that the purpose of the CCAA mandates deference to judicial decisions in the CCAA process. Newfoundland could not assume a right to appeal a CCAA decision, and one would only be granted if certain criteria were considered:

[T]here must be serious and arguable grounds that are of real and significant interest to the parties: (…) Subsumed in the general criterion are four applicable elements: (1) whether the point on appeal is of significance to the practice; (2) whether the point raised is of significance to the action itself; (3) whether the appeal is prima facie meritorious or, on the other hand, whether it is frivolous; and (4) whether the appeal will unduly hinder the progress of the action.

The criteria were not met in this case.

Leave to Appeal to the SCC?

Newfoundland Premier Danny Williams claims that the province will pursue Abitibi to the SCC if necessary. The only issue that might warrant leave to appeal to the SCC is the argument that it was not within the Quebec’s jurisdiction to interfere with a law enacted by the Newfoundland legislature. The Superior Court declined to address this argument in detail and instead focused on differentiating the EPA orders as monetary or non-monetary.

There is a fine line between immunizing the EPA orders (possibly contrary to the principle of federalism) and relegating them to the status of a claim under the CCAA. But, as mentioned earlier, the EPA contains provisions (s. 102(3) & (4)) deeming unfulfilled orders as outstanding debts to Newfoundland. The legislation recognizes the possibility that its orders may not be abided by. If that happens the target of the orders becomes indebted to the province for the unfulfilled amount. This is precisely what has happened in this case. Abitibi, for various reasons, is not able to fulfill the orders. Therefore, the debt owed to Newfoundland falls within the claims process under the CCAA. The province, per its own legislation, assumed the status of creditor.